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Apache (APA) Stock Tumbles 37.2% Year To Date: Here’s Why


Share price movement of upstream player Apache Corporation APA has been weak, both in absolute and relative terms. Year to date, Apache’s shares have plunged 36%, underperforming the industry’s decline of 22%.

The Texas-based energy company failed to impress investors this year, delivering weaker-than-expected numbers in the first two quarters. Though the company managed to post strong performance in the third quarter, it recorded lower production volumes and weak cash flows.

What’s Troubling Apache?

The three year oil slump due to the global supply glut had hit Apache hard. The company had to slash its spending and capex budget over the last two years to realign itself to the changed dynamics. This led to lower production in all the three quarters this year and marred the company’s earnings for the first two quarters. The company’s most recent adjusted quarterly output was 6.5% lower than the year-ago level. The effect of the commodity price slump has been profound on Apache’s bottom line, as the energy explorer did not hedge production.

However, with the improving commodity price environment, Apache intends to tap on the growth opportunities thereby increasing its capital investment. With returns-focused growth in mind, Apache announced 2017 capital budget of $3.1 billion, representing 60% increase over its 2016 spending. However, the company has not been able to generate strong cash flow from operations to meet its capex budget unlike other oil producers who have successfully covered their capex and dividends with the internally generated cash flows.

In the recent quarter, Apache generated $554 million in cash flows as against the capital investments of $843 million. In the first nine months of 2017, Apache recorded a cash flow deficit of $334 million after accounting capital expenditures. Apache’s Alpine High Discovery still needs a significant infrastructure development which might hurt the capital efficiency of the firm. Moreover, Apache is burdened with high leverage ratio of 53.1%. The company is compelled to rely on asset sales to generate funds to clear debt along with funding capex and dividend payments.

What Lies Ahead?

In a bid to streamline its portfolio, Apache made an exit from its Canadian Operations to increase its focus on the Permian basin — known for its high internal rates of return and low costs. In particular, Apache’s Alpine High play is expected to help the company drive crude production. We see Apache's Alpine High discovery in West Texas as a game changer. Estimated to hold massive oil and natural gas reserves, the wells are expected to have strong economics and top-tier returns.

However, the company has maintained a capex of $3.1 billion for 2018, in line with this year. Out of this, $500 million will be allocated for the development of Alpine High Infrastructure. The huge capex budget might pose cash flow problems in 2018 as well. Nonetheless, we appreciate the operational effiency and divestment initiatives of the firm which provide enough support to its financials. Only if the company generates enough cash flow from operations to meet its capex and dividend, the overall financial picture of Apache will be sound.

Zacks Rank and Key Picks

Apache currently carries a Zacks Rank #3 (Hold).

A few better-ranked players in the same industry are Denbury Resources, Inc. DNR, Northern Oil and Gas, Inc. NOG and Bill Barrett Corporation BBG. While Denbury Resources and Northern Oil and Gas sport a Zacks Rank #1 (Strong Buy), Bill Barrett carries a Zacks Rank#2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Denbury Resources delivered an average positive earnings surprise of 125% in the trailing four quarters.

Northern Oil and Gas delivered an average positive earnings surprise of 175% in the trailing four quarters.

Bill Barrett delivered an average positive earnings surprise of 19.41% in the trailing four quarters.

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